Equity release can provide a lifeline for hard-up pensioners or an early inheritance for the kids - but beware the traps

Key to the future? Tens of thousands of older couples are now tapping into wealth built up in their homes

Tens of thousands of older couples are now tapping into wealth built up in their homes as a solution to the looming crisis of pensioner poverty.

Others are instead turning to equity release as a way to financially help their children in the short term, or to pay for care fees. Larisa Brown investigates.

WHAT'S HAPPENING?

A deadly climate of low savings rates, poor pension payouts and inflation is forcing more older people on fixed incomes to take out expensive equity release mortgages.

In the future, as people live longer,
are retired for longer and receive a less generous pension, the number
borrowing money from the wealth built up in their home is expected to
soar.

From April to
June this year some 4,302 households released equity from their homes,
amounting to £224.8 million, according to figures from the Equity
Release Council — up 22 per cent from the same period last year.

Although
the numbers taking out such plans are still below the record figures in
the run-up to the 2008 financial crash, they are once again rising.

On
average, borrowers release £52,269 from their property, although they
can take up to 50 per cent of their home’s value depending on their age.

Interest
rates are typically fixed between 6 per cent to 7.5 per cent, which
means in 11 years the amount of money you owe will double.

Ros Altman, director-general of Saga, says: ‘Some people have no alternative but to borrow from their homes. People
are coming to retirement without much of a pension, and if they need
the money, it isn’t going to fall off a magic tree. The home is where
the money is.’

Homeowners
aged 65 or over own nearly £750 billion in unmortgaged property. It’s a
vast reservoir of cash that can be easily tapped into.

‘We gave £25,000 to our family’

Richard and Ruth Simmons borrowed £25,000 worth of equity from their home to give their three children a more stable future.

The couple (above), from Wiltshire, released the maximum amount from their £195,000 property given their age through income draw-down. They have been able to help their son Neil, 41, with his business, daughter Samantha, 38, secure a flat in London and her sister Kate, 35, with her midwifery studies.

They are paying 6.04 per cent interest on their loan with Aviva, organised through Key Retirement Solutions.

Mr Simmons, 66, a former senior building society manager, says: ‘Part of us thought there is no point the kids having money when we have gone. We thought let’s make some of this equity work for us and do some good now.'

HOW DOES EQUITY RELEASE WORK?

The
value built up in a person’s home over their working lives can be
converted into a reasonable — but costly — retirement income.

Equity release is a bit like an ordinary mortgage but without monthly repayments. It is typically open to the over-55s.

Instead
of getting a loan to buy a house, an equity release company hands over a
chunk of money to spend on whatever that person wants.

Because
this has a big impact on an inheritance, it’s good practice to include
children and even grandchildren in discussions when first considering
it.

There are three main types of equity release: a lifetime mortgage, a draw-down lifetime mortgage and a home reversion plan.

The
most popular type by far is a draw-down mortgage as it allows you to
release cash over time, as and when you need it. Typically, this sees
the homeowner borrow a lump sum that they can take from their property
in manageable tranches.

The
interest then builds up at a fixed rate on each chunk as you take it,
and is repaid from the proceeds of the sale of the property when the
person — or both residents if a couple — has died or goes into care.
Because interest is payable only on the cash you have taken, these plans
can often prove more cost-effective.

Similar to this is a standard lifetime mortgage. With this, you get all the borrowing at once.

As
interest accrues from the moment you take the loan, it can often double
every 11 years. It is more expensive than a draw-down mortgage.

Lastly, a home reversion plan is where you sell all or part of your home in exchange for money to fund your retirement.

You
can stay in your home rent-free for the rest of your life, but you
would be selling your home for a discount that is far less than its
actual worth.

Unlike
lifetime mortgages, a home reversion plan is not a loan, so you have no
interest or repayments. Instead, the equity release company benefits
from their share of your property when your home is sold after your
death.

HOW MUCH DO I HAVE TO PAY BACK?

There’s a huge difference in cost between the two most popular types of equity release.

For example, take a lifetime mortgage for a couple in their 70s who release £50,000 in a lump sum from their £250,000 house.

After five years, paying 6.5 per cent interest on the loan, they will owe £68,504.

After ten years it will be £93,857 — almost double the original lump sum — and after 20 years they will owe £176,182.

But
if they choose a draw-down mortgage at 6.5 per cent and release £20,000
initially, followed by three lots of £10,000 in the fourth, sixth and
ninth year, the amount they owe will be a lot less.

After five years the couple would owe £38,052, after ten years £75,649 and after 20 years a total of £142,003.

CAN IT FUND MY RETIREMENT?

This
is by far the most common reason for an equity release plan. Roughly
half of those who tap into the wealth in their home do so to help them
get by in retirement.

This
includes making up the shortfalls left by small pension pots, paying
for home improvements or even to fund a one-off holiday of a lifetime.

A
worrying 33 per cent of 60 to 65-year-olds have only a state pension to
rely on for income; they do not have final salary or private pensions,
according to Just Retirement.

Steve
Lowe, of Just Retirement which provides equity release mortgages, says:
‘In the past, it was all about the next generation and the inheritance
they leave for their children. Now more people are seeing their property
as part of their pension.’

Since
the money released is finite, borrowers must work out a budget, he
adds. Tap into £100,000 and spend a quarter of it on a six-month cruise,
and it’ll be vital to ensure the remaining £75,000 lasts you for as
long as you need it.

‘A
draw-down lifetime mortgage will probably suit many best since it
allows you to tap into cash slowly,’ says Justin Modray, at financial
advice website candidmoney.com.

‘This removes the lure of a big splurge that then leaves you shortchanged.’

‘Now we can enjoy our old age’

Equity release has put an end to the money worries of pensioners Tony and Pam Hughes (above).

The couple from Tunbridge Wells, Kent, struggled to afford their £250-a-month mortgage payment and credit card debts on their modest pensions.

So Mr Hughes, 72, a former Royal Navy officer and his wife, 69, a retired hairdresser, unlocked £58,500 from their £240,000 property with Just Retirement. They pay interest of 6.59 pc on the loan, meaning that in 18 years’ time they will owe £200,000, which they hope will be offset by the increasing value of their home.

Roughly
25 per cent of people who release equity from their homes are doing so
to pay off debts, according to figures from Just Retirement.

This
many not come as a surprise considering that the typical
over-55-year-old with personal debts, excluding mortgages, owes £22,401
(Aviva).

And 10 per cent of those aged 60 to 65 currently have an outstanding mortgage.

Many
people can afford to make only the minimum repayments on their debt,
meaning they will be paying over the odds in interest for a long time.

Borrowing from your home could, in some circumstances, be a cheaper alternative to racking up interest on a credit card.

If
you have an outstanding mortgage and don’t want to see a sizeable chunk
of your income taken out of your account every month, then paying it
off by releasing equity can give you peace of mind.

The downside is the interest makes it very costly and can quickly eat away at the life savings locked in your home.

SHOULD I SUPPORT MY CHILDREN?

This
is an emerging phenomenon as more families start to think about how
best to unlock their wealth. With younger generations struggling to get
on the property ladder, to get credit and to pay off soaring student
loans, more and more are falling back on their parents’ generosity.

The money can help them secure a mortgage, fund them through studies or help them pay off crippling debt.

The
downside is it will cost you far more to provide for your children now
than if you left it to them in your estate as your inheritance.

WILL IT AFFECT CARE HOME FEES?

The
average cost of care, whether in the home or in residential care, is
currently £26,000 a year — and is expected to rise to £33,000 per annum
in 13 years’ time.

The Government recently highlighted the role housing equity could play as a way of alleviating the crisis in long-term care.

A staggering 24,500 homes had to be sold last year to pay for care — up 20 per cent in a decade.

The
proposal is for a ‘pay after you die’ system to be rolled out across
the country. But experts claim this leaves a huge question mark over
funding, as the Government delayed any decision on a cap, or threshold,
on what makes a person eligible for care until April 2015 — a month
before the next General Election.

In
the meantime, families are left in limbo, unable to plan effectively
how much they need to save to meet future care costs, while others may
be lulled into a false sense of security about what those costs may be.

If you worried about your ability to pay for care in the future, do not release more equity than you need.

You
can also choose to protect your equity, which means you guarantee a
percentage of your property cannot be touched by your lender.

Take
the example of needing to borrow 50 per cent of the value of your home
but wanting to protect the other half to pay for future care fees. Your
lender may say you can borrow just 25 per cent of the value of your home
in return for protecting half the value of your property.

The downside is those who do save face the prospect of losing their life savings by paying for care.

SHOULD I USE AN ADVISER?

Getting independent advice on equity release is vital since it affects you and your beneficiaries.

An
adviser should not only help you find the best deal, but also get you
to consider other financial options, such as the effect on your benefits
and any inheritance you want to leave.

WHAT HAPPENS TO MY PARTNER IF I DIE?

If
your equity release plan is in joint names, they can carry on living in
the property under the same terms. However, make sure the policy is
written in joint names from the start to ensure they can stay there
safely. If not, they could face having to sell up early.

ARE THERE ALTERNATIVES?

Downsizing
is regularly touted as an option, but it can wreak emotional havoc on
many couples. Too often, many leave behind communities where they have
spent decades and fail to appreciate how much of their lives they have
given to a home.

In
the worst cases, a couple can end up trying to move back again — often
denting their wealth in the process — so make sure you talk it through
with friends as well as family.